Split CFTC Approves Box-Office Futures

Soon playing in a theater online: trading of future box-office receipts for movies on a new exchange, following approval by federal regulators.

Unless, that is, Hollywood studios get their way and Senate legislation to ban the box-office futures becomes law.

A divided Commodity Futures Trading Commission on Monday approved the proposed futures contracts for the new Trend Exchange. That means the movie futures trading can proceed; it is expected to begin sometime in the third quarter.

The first proposed contract for the exchange is for opening-weekend receipts for "Takers," being released Aug. 20. Matt Dillon plays a cop who takes on a team of expert bank robbers.

Major movie studios strongly oppose the idea. They say rival studios could sabotage films by betting against them.

In giving its approval, the CFTC said it found that box-office receipts fit the law's definition of a commodity, that the Trend Exchange contracts aren't "readily susceptible" to manipulation, and they provide a way of managing risk.

The agency's vote was 3-2. Two CFTC commissioners, Democrat Bart Chilton and Republican Jill Sommers, voted against approving the contracts for the Trend Exchange.

"Popcorn prediction markets would serve no national public interest" and don't meet the law's requirements on how commodities are defined, Chilton said in a statement.

Chilton said he also was troubled by whether the new futures trading would provide a legitimate way for the movie industry to hedge against risk, since the agency's approval limits the use of the new contracts by movie studios.

Allowing future box-office receipts to be traded like crude oil or pork bellies would give people who finance movies a way to make money even when a film doesn't. It also could be used for speculation.

Trading would be based on the amount of money a movie takes in during its opening weekend. The exchange would set the initial odds for contracts, but those odds would change based on bidding of investors. An investor who buys a contract with longer odds takes on greater risk and the potential to earn more money.

For example, an investor thinks a movie will make at least $75 million in its first weekend. The exchange finds an investor who thinks the movie will fall short of that mark and the two investors enter the contract together. When the movie receipts come in, the one who is correct gets a percentage on top of his investment based on the odds received. The other loses his investment.

The CFTC previously approved the establishment of the Trend Exchange and the Cantor Futures Exchange. The proposed futures contracts, establishing rules for trading, have now gained the agency's approval for the Trend Exchange. For the Cantor exchange, the deadline for approving the contracts is June 28.

Supporters, led by investor groups that put up the money to make films, say the concept would help generate new capital for the movie industry. A tougher economy has made it harder to finance films and trading futures on box-office receipts would help offset risk.

"We are pleased that the staff of the CFTC and a majority of the commissioners recognized the legitimate economic risk-management benefits that these products will provide to the entertainment industry," Robert Swagger, CEO of the Trend Exchange, said in a statement.

Opponents, led by big Hollywood studios, warn that complex trading brought down the housing market and this idea could do the same to the movie industry.

In Congress, the Senate version of the financial regulatory overhaul would ban futures trading on movie revenues. It's unclear if that ban will survive House-Senate negotiations on the final legislation.

The studios' lobbying group, the Motion Picture Association of America, urged Congress Monday to put the ban in the final bill that will be signed by President Barack Obama.

"It is unfortunate that the CFTC has now given the go-ahead to a new gambling platform that could be plagued by financial irregularities and manipulation," MPAA President and interim CEO Robert Pisano said in a statement. The new box-office contracts "pose real possible economic damage to an industry that employs over 2.4 million men and women working in virtually every state in the country," he said.

Also opposed are the National Association of Theatre Owners, the Directors Guild of America, and the Independent Film and Television Alliance.

Swagger said his exchange "regrets that a special-interest group of Hollywood industry insiders chose to politicize the issue (and) we will fight attempts by this group to overturn the CFTC outcome in Congress."